Which student loan is best?
June 25, 2007 12:22 PM Subscribe
I'll be borrowing $22,200 to pay for school. All other things being equal, which loan is best? All three options have a 10-year term.
Loan #1: 5.55% fixed rate; 1% principal rebate after 12 months; a second 1% principal rebate after 24 months
Loan #2: 5.55% fixed rate; zero payments for the last 6 months
Loan #3: 6.55% fixed rate; a 3.3% principal rebate after 33 months
I feel confident that I can make all payments on-time for the entire length of the loan.
I feel confident that I can make all payments on-time for the entire length of the loan.
without doing the math I imagine the first loan (5.55 fixed, lowers to 3.55 over two years) will be the cheapest. If you are taking out a student loan you will be accruing interest on the loan while in school, and the reductions dont come into effect until you have been repaying the loan for a certain time. It is better to pay 5.55 interest for 2 years than 6.55 for 2 years while in school, even if the 6.55 loan will eventually be the lowest interest rate (by less than half a point).
posted by outsider at 12:59 PM on June 25, 2007
posted by outsider at 12:59 PM on June 25, 2007
It depends on how you're paying the loan back, actually, in terms of when you start paying and how much the monthly payment is. It also depends on how the interest is compounded. I'm assuming it's monthly.
Just for yucks, if you don't make any repayments:
1) (((22200 * ((1.004625^12) ) - 222) * (1.004625^12)) - 222 ) * (1.004625^96) = = 37910.50
2) 22200 * (1.004625^120) = 38621.64
Alternately, this option might yield 22200 * (1.004625^114) = 37567.03, depending on how it works. You're not clear enough about it.
3) ((22200 * (1.005458^33) - (22200 * .033)) * (1.005458^(87)) = 41484.08
So now you know nothing at all, because what matters is obviously the payment terms. You don't give enough information to answer the question.
Furthermore, when you have zero payments for the last 6 months of loan 2, does that mean that the last 6 months of the loan are forgiven, or does it mean you're accruing interest? If the last 6 months are forgiven contingent on 9.5 years of perfect adherence to the payment schedule (not uncommon terms), that's not a very good deal - you *will* fire off a late payment one of these years, and they know that perfectly well.
Finally, these calculations don't take into account the present discounted value of future money. In order to do that right you'd need to a) know future inflation rates and b) be certain that you had the power to invest money in such a way as to beat inflation, if you chose not to pay back the loan with it. For folks just out of college neither a) nor b) is a reasonable assumption.
posted by ikkyu2 at 4:57 PM on June 25, 2007
Just for yucks, if you don't make any repayments:
1) (((22200 * ((1.004625^12) ) - 222) * (1.004625^12)) - 222 ) * (1.004625^96) = = 37910.50
2) 22200 * (1.004625^120) = 38621.64
Alternately, this option might yield 22200 * (1.004625^114) = 37567.03, depending on how it works. You're not clear enough about it.
3) ((22200 * (1.005458^33) - (22200 * .033)) * (1.005458^(87)) = 41484.08
So now you know nothing at all, because what matters is obviously the payment terms. You don't give enough information to answer the question.
Furthermore, when you have zero payments for the last 6 months of loan 2, does that mean that the last 6 months of the loan are forgiven, or does it mean you're accruing interest? If the last 6 months are forgiven contingent on 9.5 years of perfect adherence to the payment schedule (not uncommon terms), that's not a very good deal - you *will* fire off a late payment one of these years, and they know that perfectly well.
Finally, these calculations don't take into account the present discounted value of future money. In order to do that right you'd need to a) know future inflation rates and b) be certain that you had the power to invest money in such a way as to beat inflation, if you chose not to pay back the loan with it. For folks just out of college neither a) nor b) is a reasonable assumption.
posted by ikkyu2 at 4:57 PM on June 25, 2007
build a spreadsheet and dump in the particulars. which one wins will depend upon your assumptions for how much money you can earn in investment, whether you will, what inflation is, etc.
posted by caddis at 6:08 PM on June 25, 2007
posted by caddis at 6:08 PM on June 25, 2007
Apparently, most of the principal rebates for student loans require you not to miss any payments or you lose the rebate. I'd look very carefully at the contracts and probably focus on just the interest rate (and penalties) to determine how good the loan contract is. Basically ikkyu2 has it, but assuming you are going to miss a payment or two, loan 1 looks the best (you might make 12 months without missing a payment, but not 9.5 years).
posted by BrotherCaine at 10:08 PM on June 25, 2007
posted by BrotherCaine at 10:08 PM on June 25, 2007
I'm intrigued by this question, there are a million mortgage calculators on the web, but not many for student loans, and they don't take principal rebates into the calculation. When you factor in inflation, I believe loan #2 will get worse in comparison to loan #1.
posted by BrotherCaine at 10:13 PM on June 25, 2007
posted by BrotherCaine at 10:13 PM on June 25, 2007
Your profile doesn't say where you are. But if you're in Canada, you might find this amusing.
posted by flabdablet at 10:47 PM on June 25, 2007
posted by flabdablet at 10:47 PM on June 25, 2007
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posted by chunking express at 12:31 PM on June 25, 2007